NY regulator calls for moratorium on "shadow insurance" practice

Published June 12, 2013

Reuters

New York's top financial regulator has called for a national moratorium on certain transactions by life insurance companies that potentially put policyholders and taxpayers at greater risk, according to a regulatory report.

The New York State Department of Financial Services (DFS) said in a report published late on Tuesday that insurance companies use a method known as "shadow insurance" to shift blocks of insurance policy claims to shell companies ��� often in states outside where the companies are based, or else offshore ��� to take advantage of looser reserve and regulatory requirements.

Such transactions aim to help an insurance company divert the reserves that it had previously set aside to pay policyholders to other purposes, the DFS said.

However, the regulator said such transactions do not actually transfer the risk for those insurance policies as the parent company would still be liable for paying claims if the shell company's weaker reserves are exhausted.

"Shadow insurance is reminiscent of certain practices used in the run up to the financial crisis, such as issuing securities backed by subprime mortgages through structured investment vehicles and writing credit default swaps on higher-risk mortgage-backed securities," the regulator said in the report.

As part of its investigation, the regulator said it found that New York-based insurance companies and their affiliates engaged "in at least $48 billion of shadow insurance transactions to lower their reserve and regulatory requirements."

To check this practice, the DFS said it will seek disclosure of shadow insurance transactions by New York-based insurers and their affiliates. Also, the regulator asked State insurance commissioners to consider an immediate national moratorium on approving additional shadow insurance transactions.